Whether a start-up or a longstanding company, hiring workers is an essential part of owning a business. The classification of your worker as an Employee or Independent Contractor has important implications, so it is critical to understand the difference.
Generally, a worker is as an Employee when the employer has the right to control the details of how the services will be performed. Essentially, the employer is in complete control of when, how, where and how the work is done. An Independent Contractor is one who is employed to do certain work, who employs his own labor and does the work according to his own ideas and plans, to whom the owner looks only for results of the work. The employer gives deference to an Independent Contractor on details as the focus is completion of the work.
The IRS has a 20-factor test to determine whether a worker is an Employee or Independent Contractor. The following chart summarizes how each of the 20 factors support the classification of Employee or Independent Contractor:
|Instructions||A worker that is generally required to comply with instructions||A worker that is granted autonomy regarding instructions|
|Training||A worker required to receive special training from employer for the work||A worker hired for their specialized training or skill|
|Integration||Worker does work that is an “integral” part of the employer’s business||Worker does work that is less integral, even tangential, to the employer’s business|
|Services Rendered Personally||If services must be rendered personally, the employer likely wants more control over the worker||The employer permits the worker to delegate work|
|Hiring, Supervising, and Paying||The employer hires, supervises, and pays the worker directly||The work is set up via contract, and the worker can hire, supervise, and pay other assistant-workers or subcontractors|
|Continuing Relationship||Long-term engagement between employer and worker||Short-term or one-time engagement with employer and worker|
|Set Hours||Worker has set hours of work||Worker usually does not have set hours|
|Full Time Required||Worker usually on full-time basis, restricted from other meaningful employment||Worker usually not restricted as full-time employee and operates on own schedule|
|Work Done on Premises||Work could be done elsewhere, but worker is required to work on employer’s premises||Worker has freedom to complete work anywhere (if possible)|
|Order or Sequence Set||Employer requires worker to perform work in a sequence||Worker not required to follow any sequence of work|
|Oral or Written Reports||Worker required to provide regular reports||Worker not required to submit updates or reports|
|Payments by Hour, Week or Month||Worker paid by hour, week, or month||Worker paid per job or straight commission|
|Payment of Expenses||Employer generally pays worker’s travel or business expenses||Employer does not retain right to regulate business activities of worker|
|Furnishing of Tools or Materials||Employer furnishes||Worker furnishes|
|Significant Investment||Employer provides significant investment for work||Worker provides significant investment for work|
|Profit or Loss||Worker cannot realize the profit or suffer a loss from the work||Worker who can realize the profit or suffer a loss from the work|
|Working for More Than One Firm at a Time||Worker that generally provides services for one business||Worker that generally provides services for multiple businesses at a time|
|Making Services Available to the General Public||Work generally not made available to the public||Work generally made available to the public|
|Right to Discharge||Usually, the unrestricted right for employer to fire worker||Usually, the right to fire worker must be with cause.|
|Right to Terminate||Worker can terminate relationship with employer without incurring liability||Worker will incur liability if work is terminated with employer|
Under President Trump, the Department of Labor (DOL) issued a new rule on worker classification, which was withdrawn by the Biden administration. The rule would have given employers 2 primary factors in classifying workers: (1) the nature and degree of control over the work; and (2) the worker’s opportunity to earn profits or incur losses. Analysts and pundits believe the DOL’s rule was more employer friendly as it deemed two factors to be most important. The Biden administration’s revocation of the rule returns employers to the “economic realities test” which somewhat models the IRS 20-factor test.
Virginia Specific Rules
Effective January 1, 2021, Virginia applies the 20-factor IRS test in determining the classification of a worker as Employee or Independent Contractor under Labor and Employment Laws (including the Virginia Minimum Wage Act), the Unemployment Compensation Act, the Workers’ Compensation Act, and State tax laws. Workers are presumed to be Employees unless it is demonstrated that they are Independent Contractors. As mentioned, it is imperative that as a business owner you correctly classify your worker. Virginia employers that fail to properly classify the workers, and thus fail to pay the correct taxes, face a $1,000 civil penalty for the first offense, a $2,500 penalty for a second offense, and a $5,000 penalty for a third or subsequent offense.
North Carolina Specific Rules
There is no statutory definition for an Independent Contractor under North Carolina law. However, North Carolina courts have applied a “right-to-control” test for the last 60 years. Under this test, a worker is an Independent Contractor if he or she:
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